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Many U.S. regional lenders may have to consider selling off commercial real estate (CRE) loans at a steep discount after breaching key regulatory thresholds for exposure to the troubled sector, Reuters reported. Regional banks, the largest lenders to the beleaguered U.S. CRE and construction markets, have reduced their exposure to the sector by tightening standards and making fewer loans, especially in the weeks after the collapse of Silicon Valley Bank, Signature Bank and First Republic Bank. Their tightening comes as many real estate borrowers face challenges making interest payments in a rising interest rate environment, while office use has declined and property values have decreased on recession concerns. Still, previously unreported data from New York-based real estate data provider Trepp, shared with Reuters, show many regional banks' holdings exceed thresholds stipulated by regulators. Banks whose CRE or construction loan holdings exceed 300% and 100% of their total assets, respectively, should expect to receive greater regulatory scrutiny, according to 2006 guidance from the Federal Deposit Insurance Corp. and other regulators.

Property owners are starting to unload troubled office buildings at fire-sale prices, a sign that the office market slump is moving into a new phase where more landlords are ready to capitulate, the Wall Street Journal reported. In recent weeks, Blackstone sold the Griffin Towers office complex in Santa Ana for $82 million, or about 36% less than the firm paid in 2014, say people familiar with the matter. Principal Financial Group sold a Parsippany, N.J., office building for $14.3 million, down from the $52 million it paid in 2008, according to participants in the sale. The tower at 350 California in San Francisco, valued at $300 million in 2019, is expected to trade at about $60 million, or roughly 80% below that previous valuation. Office building values have steadily declined during the pandemic as shifting workplace strategies reduced demand for space and vacancies rose. Higher interest rates have also hammered the sector, making it much more difficult for landlords to refinance a property or fund the building improvements and amenities needed to attract tenants.

In the heart of Chicago’s financial center, a seven-story building occupying much of a city block was once home to the world’s largest options exchange. Now, it’s collecting dust, Bloomberg News reported. The property, for decades home to the floor where options traders jostled and screamed orders at each other, has been on the market since 2019, but owner Cboe Global Markets Inc. can’t find a buyer. The Chicago Board of Trade building, once a key commodities hub, has fared even worse, with lenders handing the keys over to Apollo Global Management Inc. Over on the Magnificent Mile, the famed shopping strip that runs north of the Chicago River on Michigan Avenue, empty storefronts dot the streets, with vacancies at a record. CME Group Inc. Chief Executive Officer Terry Duffy said in an interview that he’s prepared to leave Chicago if the city and state take steps that are perceived as “ill-conceived.” Hollowed-out downtowns are a depressing characteristic of American cities right now, whether it’s Market Street in San Francisco or Wall Street in New York. But Chicago, the third-largest city in the U.S., faces its own challenges that threaten its status as one of the main global financial hubs. Not only has the Midwest’s commercial center been struggling with the slow return of workers — the region’s office attendance is about half of pre-pandemic levels, according to security firm Kastle Systems — but the departure of major companies including Citadel and Boeing Co. stands to leave a tough-to-fill void.

Hospital systems Steward Health Care and Prospect Medical Holdings, among the largest tenants of health care real estate owner Medical Properties Trust, have brought on financial advisers to help refinance credit lines after some recent financial struggles, WSJ Pro Bankruptcy reported. Steward has hired Guggenheim Securities to refinance asset-based loans due at the end of this year. Prospect Medical is being advised by Houlihan Lokey on a refinancing effort. Past private-equity owners of Prospect and Steward each sold health facilities and real estate belonging to each company years ago to MPT in deals that left the hospital systems paying rent on property they previously owned. MPT, one of the country’s largest health care landlords, has itself faced questions about its exposure to Steward and Prospect after a challenging period for hospitals.

Federal Reserve financial stability experts are on the lookout for weaknesses after a year of rising interest rates — and as they survey the potential risks confronting the system, they are increasingly watching office loans and other commercial real estate borrowing, the New York Times reported. Fed officials have lifted borrowing costs rapidly over the past year — to just above 5 percent from near-zero in early 2022 — to cool rapid inflation by slowing the economy. So far, the fallout from that abrupt change has been most obvious in the banking sector. A series of high-profile banks have collapsed or faced turmoil in recent weeks partly because they were poorly prepared for heftier borrowing costs. But Fed staff members and market experts whom they surveyed cited commercial real estate as another area worth watching in the central bank’s twice-annual Financial Stability Report, which was released Monday. The jump in interest rates over the past year “increases the risk” that commercial borrowers will not be able to refinance their loans when the loans reach the end of their term, Fed staff wrote in the report, noting that commercial real estate values remain “elevated.” “The magnitude of a correction in property values could be sizable and therefore could lead to credit losses by holders of C.R.E. debt,” the report said — noting that many of those holders are banks, particularly smaller banks. The Fed’s comments on commercial real estate amounted to muted watchfulness rather than a full-throated warning — but they come at a time when many investors and economists are closely monitoring the sector. The outlook for office buildings in downtown areas, where workers have not fully returned after a shift to remote work that began during the coronavirus pandemic, has emerged as a particular concern on Wall Street.